Commercial Mortgage Case Study:
Your business needs financing, should your company get the loan?
Or should you borrow in your personal name and then inject the funds into your company as a ‘shareholder loan’?
Here’s a recent deal we just did. As we do with all our case studies, we change the names and basic details.
Andrew owns a small food processing business and was in need of a cash to purchase raw fruits and vegetables to start drying and processing into powder for a variety of applications.
First Andrew went to his bank to request a $250,000 loan in the name of his company, before coming to me to discuss leveraging up his house for the funds.
Andrew quickly discovers that the commercial loan comes with a lot more fees and a higher interest rate. On the commercial side, the bank would have charged an application fee ($2,500); a $75 monthly administration fee; and a $500 annual review fee. The bank also requires Andrew’s company’s financial statements on an annual basis from his accountant at a cost of $1,500 per year. None of this was required when borrowing in his personal name.
Andrew wanted to know what was involved in an “annual review” of the company. So I told him, every year the bank will collect the following:
– Accountant prepare financial statement for the company;
– A list of his personal assets and liabilities;
– Your personal credit bureau; and
– Any other information they think they need to do a full assessment.
Once they have this information they’ll perform a full review and decide if you are an “acceptable risk” to take on for another 12 months. But if they see something they don’t like there could be consequences! They could increase your interest rate, ask for more security, or even ask you to pay out the loan completely.
In his personal name, Andrew had a house with virtually no debt outstanding, a great credit score, and he had been taking out enough of a personal income to qualify for the mortgage against his home.
So it’s a pretty easy decision for Andrew. He discovers that the interest rate was 2.0% lower when borrowing in his personal name. Second, there were ZERO fees with personal financing as opposed to all the fees that come with commercial financing. Also, no reporting requirements on the personal loan, except to just make the payments as agreed.
We also talked to his accountant and confirmed that even though the financing wasn’t his company name, he could still write off the interest since it was for “company purposes”
For Andrew, the process of borrowing in his personal name and injecting into the company was cheaper, faster, and much less burdensome. At Olympic Mortgages, whether the client comes to us needing commercial or residential financing, we make sure to lay out all options that are available to that client, and really put some serious strategy into their situation. The client comes out ahead, and the client is thanking us everyday for advising him on the right thing to do. Win win.